Italy: External and internal actions look increasingly likely
28.11.11 03:29

According to Italian daily newspaper La Stampa, the IMF is considering launching a financial aid programme worth between EUR400bn and EUR600bn to support Italy. Interest rates charged would be around 4.0%-5.0%, and the length of the programme would be 12-18 months. According to the newspaper, the Italian government could draw on the funds if the fiscal and pro-growth structural reforms "fail to stop speculation" on Italian debt.
 
Meanwhile, the Italian government is likely to present next week (reportedly on December 5) a first round of additional fiscal measures aimed to secure a balanced budget through 2013. According to IlSole24Ore, the  measures could range between EUR13bn and EUR18bn. Interviewed on state TV, Lower Chamber spokesman Mr Fini hinted also at a similar timeline for the launch of the additional measures.


Our take

As we have argued in a number of reports [see our two Euro Themes: 7 Nov, Can Italy save itself? and 24 Nov, What will it take to save Italy (and the euro)?], Italy is unlikely to stabilise on its own as the size of its debt leaves it heavily exposed to changes in market sentiment in a context where self-reinforcing negative market dynamics are difficult to break with domestic policies alone .

We think the  financial support should be designed to protect market access,  rather than to take Italy fully out of the market. Italy should receive  a sufficiently large credit line, following a strong (implementation) plan by Monti's technocratic government. Italy is already under an IMF Staff Monitored Programme, which should provide timely information to the markets on the government's progress on structural reforms and fiscal adjustment.  

We think that, if confirmed, the size of the IMF programme  appears broadly appropriate. We had estimated that EUR500bn - EUR800bn would be required to stabilise Italy and Spain together (for 18-24 months). That said, with the IMF unlikely to have the resources, the EFSF and more importantly the ECB are likely to be involved as well.  Specifically, 2012-14 gross funding needs for Italy are about EUR650bn (excluding outstanding T-bills, which amount to EUR144bn). For Spain, 2012-14 gross funding needs amount to EUR313bn (excluding outstanding T-bills, which amount to EUR84bn).

The size of the additional measures reportedly to be approved by the Italian government is slightly below the amount required to balance the budget deficit. We estimate that, under the assumption of real GDP growth of +0.5% this year, -0.5% in 2012 and +0.7% in 2013, Italy would require EUR20bn - EUR25bn of additional fiscal measures. That said, we would see the report as good news, if it is accurate, as the funds mentioned would strength the primary surplus position that Italy was already likely to achieve from this year onwards.

We list below the most likely measures to be presented and also an estimate (where available) of their impact on public finances, as reported by IlSole24Ore.

While fiscal and pro-growth structural reforms alone may not be sufficient to stabilise Italy, they are nonetheless essential to elevate long-term growth and address adverse debt dynamics. Here is a list of the key measures we see as likely to be announced by the government:

Reintroduction of property tax accompanied by a revaluation of (up to) 15% of nominal value of properties (EUR5bn);
Increase of standard and reduced VAT tax rates by 1-2pp (EUR6bn-EUR8.8bn);
Introduction of a wealth tax of 0.5% above EUR1.0mn;
Anti-tax evasion measures: track down all financial transactions of at least EUR300;
Liberalisation of closed professions and local public services;
Pension reforms: extension of the contributive system to all workers from next year. Linkage of retirement age to life expectancy to increase from 2012 instead of 2013;
Project financing: private sector involvement in key infrastructure plans.


source: BarCap
 
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